Advisers didn’t look the other way, but they’ll pay for it anyway

FAAA chief executive Sarah Abood took to LinkedIn on Friday evening with a strong rebuttal of the inflammatory article published in The Australian at the end of last week – $1bn scandal: How an entire financial planning industry looked the other way while Shield and First Guardian thrived.

Published on ifa here, Abood rightfully points out that there is an incredibly small number of AFSLs that are actually involved. The ring gets even smaller when you consider the vast majority of the advice involved can be traced back to Ferras Merhi and Venture Egg.

Both Merhi and Venture Egg were authorised representatives of InterPrac Financial Planning, though the licensee has since cut ties with the adviser.

Alongside funnelling about 5,000 clients with $250 million in Shield and 3,600 clients with $192 million invested in First Guardian through Venture Egg, according to Merhi’s own previous media comments, he also controlled Financial Services Group Australia.

This licensee authorised four firms that ASIC highlighted in connection to Shield and First Guardian: Rebellis Financial Services, 5 Point Australia, AS Financial Planning, and STC Financial.

Merhi is also caught up in the lead generation portion of these failures. Between the two funds, they paid in excess of $100 million to lead generators, including Merhi owned or linked firms.

Though the exact extent of funds that went his way isn’t entirely clear yet, the First Guardian portion appears to be at least $13 million.

All of this is to say that framing the failure as the broader financial advice community looking the other way is non-sensical.

The article is absolutely right to call out the advice failures involved – anyone who has had a look at a client SOA would see it as little more than generic rationalisation to put a client in a product regardless of their circumstances or risk tolerance.

How could it be anything else when a mere handful of advisers were “servicing” in excess of 5,000 clients. Even the most efficient firm would need a couple dozen advisers to hit these numbers.

But an article that lumps all advisers in the same boat and tars honest professionals (who are going to have to cover far more of the cost for these failures than they should) with the same brush as the directors that actually committed the alleged wrongdoing shows a shocking lack of understanding at best.

As the FAAA’s Phil Anderson noted, the article provides no evidence to support its conclusions about advisers.

“To suggest that the entire profession looked the other way, implies that they knew and did nothing about it,” Anderson said on LinkedIn.

“This is a bit like blaming all law-abiding drivers for the damage that drunk drivers cause and then suggesting that they should have stopped it. ASIC has identified that only five of 1,700 advice licensees were involved. How can you blame the 1,700 for what five did?”

Even for the advisers that were involved, he contended that there would be no way for them to know just how poorly the businesses were being run, particularly if a group of “major super funds” didn’t.

It’s a fair point. The most cynical view would be that they knew it would fall apart and didn’t care, but from a self-interest point of view it makes more sense that they figured it would perform alright and there wouldn’t be any harm.

After all, having your assets frozen and being taken to Federal Court doesn’t sound like a lot of fun.

This is where the inherent unfairness of the CSLR comes in. It is likely that a large amount of the advice will be found to have involved misconduct, however even the worst examples will pale in comparison to what the fund RE’s were alleged to have been up to.

Co-mingling of funds, paying redemptions from new investors, and splashing out on a Lamborghini should all be a bit higher on the list of concerns.

Yet no other member of the managed investment scheme ecosystem will have to drop even a cent to cover the losses.

For advisers, it’s yet another bill set to be slapped across their desks for conduct they had nothing to do with and, as Abood pointed out, blew the whistle on.

“In cases that we are aware of, advisers saw and were horrified by advice they had been asked to review as a second opinion – and reported the entities involved to ASIC (which has, to its credit, acted swiftly and devoted substantial resources to these investigations),” she detailed.

“And many advisers are currently working with the victims, doing everything they can to help them recover as much as possible and get their financial plans back on track.”

Where the danger in an article like this lies in tarnishing the public perception of every member of the profession.

It also gives critics of financial advisers more ammo.

Xavier O’Halloran, CEO of Super Consumers Australia, for instance, called the article a “great read” on LinkedIn.

“In light of this slow car crash unravelling over the past year, it’s bizarre we’ve seen these constant calls to water down consumer protections in advice and gut the compensations scheme of last resort,” he said.

Unfortunately, it’s hard to imagine exactly what further imposts on financial advisers could have curbed this kind of behaviour.

Simply stated, you can’t legislate morals.

The government could make ethics the basis of all 40 hours of CPD every year and it wouldn’t stop someone who knows they’re doing the wrong thing.

At that point it’s not a matter of understanding ethics, it’s a matter of having some.

As an addendum, there is a widespread acknowledgement that advisers will have to cover the tab. However, InterPrac is the licensee with the most exposure and as things stand is still in operation.

It would need to go insolvent before the CSLR is pulled in for the Venture Egg advice.